Toronto is in big financial trouble -- and there isn’t a plan to fix it

Thestar.com
May 19, 2020
Jennifer Pagliaro

Have you ever felt that sinking feeling when you face a huge unexpected expense, your wages have been cut suddenly and there’s not much left in your bank account?

Now imagine that your household is actually three million strong and those people who rely on you for shelter, day care, transit and more need you to come up with $1.5 billion to break even.

That’s the situation the city of Toronto finds itself in becaue of the unprecedented COVID-19 crisis.

The Federation of Canadian Municipalities has called on the federal government for emergency operating funding of $10-15 billion over the next six months. But there has yet to be any bailout plan announced, with the country’s largest city expecting to run out of cash as early as June.

What has COVID-19 cost Toronto?

Last month, the city’s senior staff reported that in the “best-case scenario,” there would be a $1.5-billion shortfall by the end of the year: $938 million estimated for impacts directly related to a three-month lockdown and $590 million during a six-month recovery phase as restrictions ease.

That shortfall can be grouped into two distinct categories: Lost revenues -- money the city was expecting to make through means like TTC fares, which have now plummeted due to social distancing -- and additional costs, like opening additional shelter space to spread out those experiencing homelessness and reduce risk of infection spread and staff overtime.

The COVID-19 pandemic has sent transit ridership and fare revenue plummeting to a fraction of pre-crisis levels.

But even those might be conservative estimates. For example, city staff say the TTC was expected to lose $337.8 million between March 15 and June 30 and another $134 million during the rest of the year. But the TTC has since said the transit agency is expected to lose $520 million by Labour Day -- the single biggest driver of the city’s shortfall.

The $1.5-billion shortfall is more than all of the money the city planned to spend on children’s services and day care in 2020 ($635 million), the entire parks, forestry and recreation budget ($456 million) and the senior services and long-term-care budget ($271 million) combined.

Can’t the city borrow to get by?

Currently, no. The city can’t go into deficit to pay for operating expenses, as dictated by provincial law. The provincial government could change those rules in light of the pandemic -- as B.C. has done. But even if Ontario followed suit, Mayor John Tory has said it’s not something he’d want the city to do, because it would still have to find a way to pay back those funds with limited resources.

Enid Slack, director of the Institute on Municipal Finance and Governance at the University of Toronto’s Munk School of Global Affairs and Public Policy, said borrowing could be a short-term solution, but creates more problems in the long run.

“When you borrow money, you have to pay it back -- and you’re going to have to pay it back in 2021, 2022,” said Slack. “People have had their taxes deferred, so they’re going to have to pay their regular taxes plus the amount they deferred. Businesses -- some of them we know are not going to come back, so that part of the municipal tax base is going to shrink.

“Is that a time to say to people, ‘Well, we’re going to have to raise your taxes now and we’re going to have to cut services to make up for what we did in 2020?’”

Can the city raise taxes?

Technically, yes. But the amount required to raise enough to cover the gap even in the best-case scenario would be a burden on municipal taxpayers never experienced before.

The city can’t go into deficit to pay for operating expenses, as dictated by provincial law. The provincial government could change those rules in light of the pandemic -- as B.C. has done. But even if Ontario followed suit, Mayor John Tory has said it’s not something he’d want the city to do, because it would still have to find a way to pay back those funds with limited resources.

According to the city, in order to raise $1.5 billion, taxes would have to jump by 47 per cent -- or an additional $1,418 for the average homeowner in 2020.

The alternative is cutting city services. But making up the difference through savings alone would likely lead to a dramatic decrease in city programs that people rely on and risks disproportionately impacting already marginalized groups.

Does the city have savings?

Yes, but not enough. The city is required to have a balanced budget, but also puts money in the bank for a rainy day every year, depending on the circumstances. For example, if there is a real estate boom, the city could collect more revenue through the municipal land transfer tax than predicted. That might lead to a budget surplus, which can be put into reserve funds to use another year.

Those reserve funds are used for things like replacing aging city vehicles or to make up for tax revenue if it’s lower than expected, because of, for example, an economic downturn.

Early in the pandemic, the strategy to cover the $65 million a week that the emergency was costing the city included dipping into the city’s surplus funds. But that strategy, city manager Chris Murray said earlier, will dry up by June -- at which point some other intervention is needed.

“In the short run they’re kind of making do, but it can’t last,” Slack said.

What about Ontario or Ottawa?

As of April 15, confirmed contributions from the federal and provincial governments only totalled $61.4 million, city staff reported to council this week. That was already factored in to the city staff’s accounting that it will be $1.5-billion short by the end of the year.

Don’t they already help Toronto?

The other governments contribute to the capital costs of major infrastructure projects like new transit lines. Slack said those infrastructure funds allow the city to spend its funds elsewhere.

However, after decades of downloading services onto the municipal tax bases, renewed contributions have been slow to materialize -- like the federal promise last year to spend $1.3 billion to repair Toronto Community Housing after hundreds of units had already been shuttered.

Other essential services, like the TTC, receive little direct operating support from the other levels of government and the ones that did were earlier targeted for budget cuts by Premier Doug Ford.

Ontario premier Doug Ford enters the Ontario Legislature at Queens Park, May 12, 2020.

In 2020, TTC fares from riders were to cover 59 per cent of the agency’s operating budget, while city taxpayers funded 33 per cent. The provincial government provided funding through the gas tax, which was to offset just four per cent of the TTC’s operating costs. While fares have increased and city taxes have contributed a greater amount for the past seven years, according to city staff, provincial funding has not increased.

Is $1.5 billion all the city needs?

Shirley Hoy, who was Toronto’s city manager from 2001 to 2008, said there’s no guarantee the city will bounce back to its former state by this time next year. She pointed to depressed TTC ridership and questioned whether it would simply return to pre-COVID-19 levels.

“In this particular situation, just giving short-term financial relief will not help,” Hoy said.

The other governments must recognize the need to restructure service delivery over a longer period that takes public health requirements into account, she said.

“It would be much more helpful if it could be a transition plan of two years.”